Save Article

Rio Tinto Charges Highlight Chaos in Iron-Ore Trading

By

James T. Areddy and

Alex Wilson

Updated March 22, 2010 12:01 a.m. ET

SHANGHAI—A courtroom admission of bribetaking by some
Rio Tinto
PLC employees on trial here has highlighted the topsy-turvy world of iron-ore trading in China, which can provide ample opportunity for unscrupulous activity.

In resource-rich countries, exploration companies are sometimes under pressure to give bribes, often in exchange for extraction rights. In China, the employees in the Rio Tinto case, including Australian national Stern Hu, are charged not with making payments but receiving them.

In China, high-grade iron ore is in short supply, shipping prices are volatile and hundreds of steel companies compete against each other to buy ore to meet their aggressive production targets. The difficulty in locking in supplies at predictable prices opens the door to bribery.

On Tuesday morning, the Shanghai court wrapped up testimony about the alleged bribery, but attending Australian consular officials and lawyers declined to provide details. The final half of the case, expected to conclude Wednesday, is closed to spectators. It isrelated to allegations that the four Rio Tinto executives stole commercial secrets.

No charges or responses have been made public. Rio Tinto initially denied wrongdoing by its employees when they were arrested in August but has since avoided addressing details of the case. It has called broadly for a transparent trial.

Few specifics have emerged of how the alleged bribery was structured, such as in most cases the identities of the executives' purported co-conspirators and the timing of the alleged activity. What is known is that on the opening day of the trial Monday, prosecutors alleged that about $11.25 million in bribes were accepted by the Rio Tinto employees, say lawyers who attended the sessions.

That represents about one-third of a single day's sales in 2009 in China, where Rio Tinto reported $10.69 billion in revenue, 24% of its global total.

The four defendants include Mr. Hu, an Australian citizen born in Tianjin, China, who led Rio Tinto's sales team for much of the past decade.He was hired to run Rio Tinto's iron-ore sales business in the country's north in the mid-1990s, became an Australian citizen in 1997 and about four years later took charge of the miner's national sales team.

Mr. Hu admitted to taking money but challenged the amount he accepted, according to lawyers. They say the three Chinese nationals appeared to challenge parts of the allegations as well.

One of the accused is being tied to one of China's wealthiest private steelmakers, a lawyer said Tuesday. Defendant Wang Yong is suspected of receiving $9 million from Du Shuanghua, the billionaire owner of Shandong-based Rizhao Steel Co., said the accused man's lawyer, Zhang Peihong. The lawyer offered no details of the allegation except to say cash changed hands and that Mr. Wang in court disputed some aspects of the allegations. The company said Mr. Du wasn't available for comment.

Statements of guilt by the executives may be a courtroom tactic aimed at winning sympathy during sentencing, legal analysts said.

Members of Rio Tinto's mineral-sales team are paid straight salaries and bonuses based on corporate, not individual, performance.

The analysts contend it is unlikely the four will escape punishment. Few cases in China that make it to trial end in acquittal, and the best the accused may hope for is leniency in sentencing. In China, Rio Tinto's business puts its executives face to face with the world's largest steel industry, one with more than 800 companies that together produce about 40% of world output. None control more than 5% of the market, or have much negotiating leverage with suppliers of iron ore, a metallic black or red rock that is the industry's basic feedstock.Australian iron ore from Rio Tinto is especially high grade and in demand.

China spent $50.14 billion importing ore last year, more than any nation. The government concedes it has been unable to negotiate pricing, buy in a systematic way or allocate the mineral effectively.

Until recently, benchmark world-wide ore prices were established in high-stakes annual negotiations between sellers and major customers in Japan and South Korea. This benchmarking system has been undercut by the explosion in demand from China's diffuse steel industry. Today, many Chinese steelmakers approach sellers directly to negotiate prices, and have frustrated various strategies by Beijing to translate national demand into bargaining power.

As they await efforts to restructure the global pricing system, suppliers and their brokers alike in China are keen to ensure contracted sales actually get fulfilled.

Rio Tinto and China

See a timeline of China's detention of four Rio Tinto executives.

Related Video

Ore can take 45 days to arrive in China from Australia, Brazil, India, Mauritania and a handful of other nations where it is extracted. During that time, its price is subject to volatility, including in the cost of shipping and of unexpected delays in offloading at ports. Minor fluctuations on a 150,000-metric-ton cargo can add up to big money. In this chaotic system, those familiar with the industry say, customers sometimes resort to bribing salesmen.

"You are paying the buyer to buy the goods but the buyer is going to take care of you as well," says a Shanghai-based minerals dealer who has dealt extensively in iron ore and says he has witnessed numerous corrupted deals.

Under a kickback scenario outlined by the dealer, a potential buyer might tell a would-be supplier's representative that he will pay him $2 a ton personally for every ton sold at a certain and presumably preferential price. "That's essentially a bribe," says the dealer.

In watchdog group Transparency International's 2009 Corruption Perception Index, China placed 79th on a list of 180 nations, behind Brazil and Peru, but better than India and Thailand.

The global mining industry is no stranger to murky legal environments. With resources starting to dwindle in established mining countries, companies are increasingly searching for their next big project. The search for new frontiers has raised risks associated with unstable governments: ethnic conflicts, weak rule of law, lax environmental regulations. All have embroiled miners in controversies and conflicts.

Rio Tinto and its main competitor,
BHP Billiton Ltd.
BHP 0.92%
, have in recent years sought to shape their corporate cultures to guard against bribery, in part by emphasizing best practices.

This week, Rio Tinto officials have highlighted an ethics code displayed prominently on its Web site that includes antibribery provisions, including translation into Chinese. But beyond the idiosyncrasies of China's iron-ore trade, the nation is a difficult one in which to monitor executives.

Journal Community

"Companies like Rio Tinto rely heavily on people like Stern Hu, who were brought up in China or are citizens of China, who understand the cultural complexity of the system," said Pradeep Taneja, who lectures on Chinese business and politics at the University of Melbourne and is a former consultant to the Chinese steel industry.

As the pricing system has been adjusted, Rio Tinto increasingly sidestepped the government-run ore allocation system and began selling more directly to Chinese steelmakers, according to analysts.

Industry analysts say many Chinese steelmakers care more about guaranteeing their access to the mineral to maintain production than how much it costs to obtain it.

Chinese prosecutors haven't publicly outlined their charges against the Rio Tinto employees, and the lack of transparency in the process has raised concerns among businesses that it reflects government displeasure with the company's strategies in China.

The heat on Rio Tinto has remained: A Chinese researcher addressing a United Nations conference in Geneva on Tuesday characterized the pricing of Rio Tinto, BHP and Brazil's
Vale SA
VALE 1.30%
as monopolistic and not based on supply and demand, saying their pricing has cost his nation's industry billions of dollars.

—Devon Maylie in Geneva and Li Yue in Shanghai contributed to this article.